Question

E16-1 Mr. Taliaferro is studying for an accounting test and has developed the following questions about investments. 1. What are three reasons why companies purchase investments in debt or stock securities? 2. Why would a corporation have excess cash that it does not need for operations? 3. What is the typical investment when investing cash for short periods of time? 4. What are the typical investments when investing cash to generate earnings? 5. Why would a company invest in securities that provide no current cash flows? 6. What is the typical stock investment when investing cash for strategic reasons? Instructions Provide answers for Mr. Taliaferro.

Answer 1

Question: What are three reasons why companies purchase investments in debt or stock securities?

Sol: Three reason are as follows

1. To utilize idle funds effectively:

  In day to day business companies may have idle funds (cash). so, to make these funds into effective companies invest for a  short period and they get some return on these investments until the funds are required for the company's regular business. The ultimate objective is to enhance the shareholders wealth.

2. To influence or acquire a company:

  This is also one of the many reasons for a company to invest in securities of another company is to gain influence over the over business decisions of that company. Some times they invest with the intention to acquire the other company. It is a part of strategic decision.

3. Diversification:

Sometimes companies invest in securities of other companies to protect themselves, if any business or industry or economic downturn happens. Because that downturn periods leave their revenues dried out. In these times it is important to invest idle funds in securities that have potential to generate additional income during slow periods.